SEC ISSUES ANNUAL REPORT ON CREDIT RATING AGENCIES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission issued its annual staff report on the findings of examinations of credit rating agencies registered as nationally recognized statistical rating organizations (NRSROs).  The agency also submitted an annual staff report on NRSROs to Congress.

“The two reports reflect an evolving industry,” said Thomas J. Butler, director of the SEC’s Office of Credit Ratings.  “The examination report shows that the SEC’s vigilant oversight is improving compliance at NRSROs, while the annual report to Congress depicts an industry that is growing more competitive and transparent.”

The 2010 Dodd-Frank Act requires the SEC to examine each NRSRO at least annually and issue a report summarizing key findings of the examinations.  The report discusses the staff’s findings and recommendations for each of the 10 NRSROs.  Among the areas examined are whether each NRSRO conducts business in accordance with its policies, procedures, and methodologies as well as how an NRSRO manages conflicts of interest and whether it maintains effective internal controls.

The report noted, for instance, that the staff found one or more NRSROs lacked comprehensive procedures governing ratings placed under review.  The staff also found that oversight of the process for developing new rating methodologies and criteria was not sufficient at one or more NRSROs to ensure independence from business and market share considerations.

The 2013 examination report highlights certain improvements among NRSROs, such as increased investment in compliance systems and infrastructure along with enhancements in compliance training for both analytical and non-analytical employees.  These improvements address recommendations that the staff made to NRSROs on prior examinations.

The annual report to Congress, which is required by the 2006 Credit Rating Agency Reform Act, identifies the applicants for NRSRO registration, actions taken on the applications, and the SEC’s views on the state of competition, transparency, and conflicts of interest among NRSROs.

Observations from the 2013 annual report include the following:

The number of NRSROs rose to 10 with HR Ratings de México, S.A. de C.V., registering in November 2012.
Some smaller NRSROs have gained significant market share in ratings for certain types of asset-backed securities.
Transparency is increasing due to the NRSROs issuing unsolicited commentary on ratings issued by other NRSROs.

The following SEC staff made significant contributions to the examinations and reports: Abe Losice, Michele Wilham, Kenneth Godwin, Natalia Kaden, Harriet Orol, Jacob Prudhomme, Diane Audino, Kristin Costello, Scott Davey, Shawn Davis, Michael Gerity, Julia Kiel, Joanne Legomsky, Russell Long, Carlos Maymi, David Nicolardi, Sam Nikoomanesh, Joseph Opron, Abraham Putney, Mary Ryan, Warren Tong, Evelyn Tuntono, and Kevin Vasel.